1

Location Analysis Decision-making

Need to identify factors that are important for the location decision being made

Relevant factors will be influenced byType of facilityGeography involved

2

Types Of Facilities

Heavy manufacturingauto plants, steel mills, oil refineries

Light industrysmall components manufacturing,

assembly and packagingWarehouse & distribution centersRetail & service

3

Factors In Manufacturing & Light Industry Plant Location

Labor availability, cost and attitudeRaw material & finished goods shipment

modesProximity to raw materialsUtilitiesConstruction costsLand costs

4

Factors In Warehouse Location

Transportation costs

Proximity to markets

5

Factors In Retail & Service Location

Proximity to customersAccessibility for customersAttractiveness of facility

6

Location Decision Sequence

Country

© 1995 Corel Corp.

Region/Community

© 1995 Corel Corp.

Site

© 1995 Corel Corp.

7

Global Location Factors

Government stability Government regulations Political & economic systems Economic stability & growth Exchange rates Culture Climate Export import regulations Duties & tariffs Raw material availability Position of global markets

Number and proximity of suppliers

Transportation & distribution system

Labor cost & education Available technology Commercial travel Technical expertise Cross-border trade

regulations Group trade agreements

8

Ranking of Countries in the 2010 - 2011 Global Competitiveness Report (World Economic Forum*)

1 Switzerland

2 Sweden

3 Singapore

4 U.S.

5 Germany

6 Japan

7 Finland

8 Netherlands

9 Denmark

10 Canada

11 Hong Kong

12 United Kingdom

13 Taiwan, China

14 Norway

15 France

16 Australia

17 Qatar

18 Austria

19 Belgium

20 Luxembourg

* http://www3.weforum.org/en/initiatives/gcp/Global Competitiveness Report/index.htm

9

Regional Location Factors

Labor (availability, education, cost & attitude)

Proximity of customers Construction/leasing

costs Land costs Modes and quality of

transportation Transportation costs Proximity of suppliers

Taxes Incentive packages Governmental

regulations Environmental

regulations Raw material availability Climate Infrastructure Education system

10

Factors Affecting Site

Site size and cost Air, rail, highway,

and waterway systems

Zoning restrictions Nearness of

services/supplies needed

Environmental impact issues

© 1995 Corel Corp.

11

Location Decision Example

In 1992, BMW decided to build its first major manufacturing plant outside Germany in Spartanburg, South Carolina.

© 1995 Corel Corp.

12

Country Decision Factors

Market location U.S. is world’s largest

luxury car market Growing (baby boomers)

Labor Lower manufacturing labor

costs $17/hr. (U.S.) vs. $27

(Germany) Higher labor productivity

11 holidays (U.S.) vs. 31 (Germany)

OtherLower shipping

cost ($2,500/car less)

New plant & equipment would increase productivity (lower cost/car $2,000-3000)

13

Region/Community Decision Factors

Labor Lower wages in South Carolina (SC)

About $17,000/yr. (SC) vs. $27,051/yr. (US) Based on 1993 metropolitan averages for

all workers

Government incentives $135 million in state & local tax breaks Free-trade zone from airport to plant

No duties on imported components or on exported cars

14

Location Evaluation Methods

Factor-rating method

Center of gravity method

Transportation model

15

Factor-Rating Method

Most widely used location techniqueUseful for service & industrial locationsRates locations using factors

Intangible (qualitative) factors Example: Education quality, labor skills

Tangible (quantitative) factorsExample: Short-run & long-run costs

16

Steps in Factor Rating Method

List relevant factors Assign importance weight to each

factor (0 - 1) Develop scale for each factor (1 - 100) Score each location using factor scale Multiply scores by weights for each

factor & total Select location with maximum total

score

17

Location Factor Example

Labor pool and climateProximity to suppliersWage ratesCommunity environmentProximity to customersShipping modesAir service

.30

.20

.15

.15

.10

.05

.05

80100

6075658550

65919580909265

90757280956590

Location Factor Weight Site 1 Site 2 Site 3

Scores (0 to 100)

18

Location Factor Example

Labor pool and climateProximity to suppliersWage ratesCommunity environmentProximity to customersShipping modesAir serviceTotal Score

24.0020.00

9.0011.25

6.504.252.50

77.50

19.5018.2014.2512.00

9.004.603.25

80.80

27.0015.0010.8012.00

9.503.254.50

*82.05

Location Factor Site 1 Site 2 Site 3Weighted Scores

19

Center of Gravity Method

Finds location of single distribution center serving several destinations

Used primarily for services & warehousing Considers

Location of existing destinations Example: Markets, retailers etc.

Volume to be shipped Shipping distance (or cost)

Shipping cost/unit/mile is constant

20

Center of Gravity Method Steps

Place existing locations on a coordinate grid Grid has arbitrary origin & scale Maintains relative distances

Calculate X & Y coordinates for ‘center of gravity’ Gives location of distribution center Minimizes transportation cost

21

Center of Gravity Method Equations

ddixix = x coordinate of = x coordinate of

location ilocation i

WWii == Volume of Volume of

goods moved to or from goods moved to or from location i location i

ddiyiy = y coordinate of = y coordinate of

location ilocation i

X CoordinateX Coordinate

Y CoordinateY Coordinate

ii

iiix

x W

WdC

ii

iiiy

y W

WdC

22

Center-of-Gravity Example

y

700

500

600

400

300

200

100

0 x700500 600400300200100

o

A

B

C

D

Center

A B C DX 200 100 250 500Y 200 500 600 300Wt 75 105 135 60

23

Location Analysis Technique

Transportation Method

Identify a location for a new facility so that the location minimizes the company’s overall cost of production and transportation for the supply chain.

To perform this analysis, one must be able to model a given set of facilities and identify the shipping strategy that will minimize the total shipping costs.

24

Balanced Transportation Models

A transportation problem is balanced if

Total supply at all of the sources =

Total demand at all of the destinations

The mill problem is currently balanced with Total Supply = Total Demand = 600 tons

In this case, all of the units are shipped from the sources and all of the destinations receive their demand

25

Unbalanced Transportation Models

If Total supply at all of the sources >Total demand at all of the destinations, the problem is feasible. There will be unshipped

units at some of the source locations though. (Resolve model with Kansas City supply set

equal to 200 tons)

If Total supply at all of the sources <Total demand at all of the destinations, the problem will be infeasible. (Resolve model with Kansas City supply set

equal to 100 tons)

26

Solving an Infeasible Unbalanced Transportation Model

The model needs to be balanced in order to identify an optimal shipping strategy. An extra source must be added into the model to supply the current shortage.

Extra capacity needed = Total demand at all destinations – Total supply at all current sources

To create this additional source of supply/capacity, either

Acquire a new facility and include it in the network design and spreadsheet model’s table structure

or

add a Dummy source into the model’s table structure

27

Solving the Mill Transportation Problem when Kansas City has only 100 tons capacity

In this problem, the total demand exceeds the total supply by 600 – 550 = 50 tons

Insert a dummy grain elevator with a capacity of 50 tons and a unit shipping cost of $0 to each mill. Edit the spreadsheet model and Solver dialog box to include this new imaginary source.

The identified optimal solution will identify how many tons to ship from each grain elevator to each of the mills. The tons shipped from the dummy elevator are units that will not actually be distributed; these are the amounts that the receiving mills will be short in the eventual distribution.

28

Building a new grain elevator when Kansas City has only 100 tons capacity

In this problem, the total demand still exceeds the total supply by 600 – 550 = 50 tons

Insert a possible location for a new grain elevator with a capacity of at least 50 tons along with the identified unit shipping costs from this location to each mill. Edit the spreadsheet model and Solver dialog box to include the new grain elevator at this location.

The identified optimal solution will identify how many tons to ship from each grain elevator, including the additional elevator at the new location, to each of the mills so as to minimize total costs

29

HHN, Inc. Cabinet Problem

Read the HHN, Inc. Cabinet problem

Is the current transportation problem with the three plants and four market areas balanced?

How would you identify whether Beijing or Fountainbleu is a better location for a fourth plant?